Flash Report: Applied Underwriters’ Accounting Challenged in Lawsuit

By: Brad Cain

An employer who spent three years in Applied Underwriters’ EquityComp program is now questioning the company’s accounting practices in a Missouri lawsuit.

Hillyard Industries filed the case after its bills in the final two months roughly doubled the overall cost of the program.

The company maintains, as do many others in multiple states, that the Berkshire Hathaway (NYSE: BRK.A) subsidiary used an unfiled and therefore illegal reinsurance participation agreement (RPA). Hillyard charges Applied Underwriters used the RPA to inflate the fees and expenses charged under the program. Applied is seeking to collect over $2.3 million from the company and to enforce the RPA’s arbitration provisions.

“Though Hillyard’s actual loss experience during the program was lower than had been estimated by Applied Underwriters at the outset of coverage, Hillyard was nonetheless billed by Applied Underwriters for total sums in excess of the expected range of program costs provided during the marketing of the program,” the company says in the lawsuit. Hillyard filed the legal challenge in Missouri state court where it is headquartered.

“The Hillyard, case exemplifies one of the more pernicious aspects of the EquityComp program,” says California attorney Nicholas Roxborough. “As a penalty, the RPA imposes an undisclosed “Run-Off” loss development factor if [an insured] fails or refuses to renew the program for another three-year term.”

Hillyard is demanding access to Applied’s books to get a complete accounting of the charges.

Applied used a policy issued by California Insurance Company to cover Hillyard’s operations in Arizona, California, Connecticut, Georgia, Oregon, Texas, and Utah. A policy issued by Continental Indemnity Company included all other states where Hillyard operates.

Hillyard says it received a bill for $1.9 million in November 2015 and an additional invoice for over $400,000 in December 2015 as the program was wrapping up. Prior to that, it says it paid a total of just under $1.3 million in addition to premium paid under the workers’ comp policies.

At the outset, the estimated annualized pay-in amount for Hillyard was between $452,645 and $2,144,345 and $1,357,935 and $6,433,035 for the three-year period of the RPA with the proposed effective date of December 31, 2012. Applied is pursuing arbitration for $2,340,991.17 along with interest, attorney fees and arbitration costs. Hillyard refused to make any more payments and maintains that Applied “failed and refused to provide Hillyard with an explanation of the manner in which they calculated the billings or provide the rates and factors used in its calculations, despite repeated demands for same.”

Roxborough says “Applied does not appear to have any obligation to offer a renewal to an insured. Thus, Applied could impose unless restricted by the CDI or courts, punitive LDF’s on any policyholder simply by refusing to offer a renewal.”

Misrepresentations Alleged

“On information and belief, the EquityComp program was marketed by Applied Underwriters as a program where a participant’s ongoing claims experience would be used to determine the actual program cost. This is false,” Hillyard maintains in the lawsuit. “The actual cost of the EquityComp program under Applied Underwriters’ RPA was not measured by the actual claims experience of a participant, particularly where a participant had total losses below that which had been previously estimated by Applied Underwriters.”

“Clearly, the change from active LDFs to Run-Off LDFs does not logically relate in any way to the development of the claims themselves,” Roxborough says, “but is entirely keyed off of whether the insured renews the program for another three-year term. This means that an employer’s LDFs can almost double simply because the employer’s term of three years ends and it elects not to renew or Applied Underwriters’ does not offer renewal.”

Hillyard says it relied on allegedly deceptive sales and marketing tactics and that Applied failed to disclose the RPA either to it or its insurance broker during the sales and marketing process. Hillyard also says it was presented with the RPA only after it agreed to coverage under the EquityComp program. The company says it was told that coverage would not be bound if the RPA was not signed and returned. “This caused duress to Hillyard as Hillyard was required either to sign the RPA or, alternatively, be without its workers’ compensation coverage,” the company argues.

Hillyard is asking the court to declare the RPA void and unenforceable and to require Applied to provide a complete accounting of all sums about the RPA. Hillyard is also seeking to recover all benefits that Applied may have obtained as a result of unlawful business practices, as well as compensatory and punitive damages.

Carmel-based attorney Larry Lichtenegger, who handles most of the Applied litigation in California, is working Hillyard’s attorneys.


Applied Underwriters was once but is no longer an affiliate of Berkshire Hathaway. Applied’s management bought it. Berkshire Hathaway bears no responsibility for any of the events which have transpired involving Applied Underwriters’ or its subsidiaries including California Insurance Company.